In some instances, that discount rate may be approximated by market yields for a hypothetical bond portfolio whose cash flows reasonably match the pattern of benefits expected to be paid in the future. For each year in which the actual rate of investment return exceeds the target rate of return, the Georgia ERS will reduce its investment return assumption by 0.1% (10 basis points) until a target rate of return assumption of 7.0% is reached. b. The UK's biggest discount supermarkets are increasingly eyeing a new market of their own; several employers have signed up to a pension scheme which could see them pay in 7% of your salary; and . The actual increases in the dollar-denominated amount reflect a consistent past practice. If high-quality corporate bonds available in the marketplace are trading at negative yields (i.e., their present value is greater than their nominal future cash flows), an employer would need to purchase an amount of bonds that exceeds the notional undiscounted future benefit payments to generate a stream of future cash flows to pay the benefits when due. Document Number: 197 Assuming pension plans achieve a conservative 3 percent return in fiscal year 2019-2020, Reason Foundation Pension Integrity Project's calculations show that the 20-year aggregate average rate of return would be only about 5.9 percent, falling far short of the current weighted average assumed rate of return of 7.25 percent. The actuary may assume select and ultimate inflation rates in lieu of a single inflation rate. B. The actuary should develop a reasonable economic assumption based on the actuarys estimate of future experience, the actuarys observation of the estimates inherent in market data, or a combination thereof. A number of factors may interact with one another and may be components of other economic assumptions, such as inflation, economic growth, and risk premiums. Measurements of defined benefit pension plan obligations include calculations such as funding valuations or other assignment of plan costs to time periods, liability measurements or other actuarial present value calculations, and cash flow projections or other estimates of the magnitude of future plan obligations. Actuarial Assumptions - MERS | Municipal Employees - MERS) of Mich resulting real rate of return assumption. 1 0 obj This relationship is especially strong for firms whose reported income is the most sensitive to pension assumptions. Judgment should be applied to determine whether a planned change is probable. The average investment return rate assumption for U.S. public pension funds has fallen below 7.0%, to its lowest level in more than 40 years, according to the National Association of State Retirement Administrators. b. Defeasance or SettlementAn actuary measuring a plans present value of benefits on a defeasance or settlement basis may use a discount rate implicit in annuity prices or other defeasance or settlement options. These assumptions include the discount rate and estimate of future salary and benefits levels. Actuarial Standard of Practice No. Over the past decade, pension funds have lowered the return assumptions that inform their investment decisions from a median of 8% in 2009 to 7.25% as of 2019. Assumed discount rates should be reevaluated at each measurement date, including interim remeasurements required in connection with accounting for plan amendments, settlements, curtailments or other significant events. However, the effect of omitting assumptions for all four types of future events may be a material understatement or overstatement of the measurement results. 4 or 6, ASOP Nos. Some large actuarial firms have developed specific bond matching models and nearly all of the largest actuarial firms and other organizations have developed spot-rate yield curves to assist employers in developing their discount rate assumptions. Consistency is not necessarily achieved by maintaining a constant difference between one economic assumption and another. Figure PEB 2-1 illustrates the calculation of the expected long-term rate of return using a weighted average approach. IoD In the public plan arena, many entities perform assumption reviews every few years, and these reviews may or may not lead to assumption adjustments. endstream endobj startxref PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Public Pension Investment Performance Has Historically Fallen Short of Actuaries can still set other economic assumptions, such as compensation increases, inflation, or fixed income yields. Draft revisions of ASOP Nos. In such plans, the untimely liquidation of securities at depressed values may be required to meet benefit obligations. Small changes of 25 or 50 basis points in these assumptions can change the measurement by several percentage points or more. For this purpose, an assumption is reasonable if it has the following characteristics: a. it is appropriate for the purpose of the measurement; b. it reflects the actuarys professional judgment; c. it takes into account current and historical data that is relevant to selecting the assumption for the measurement date, to the extent such relevant data is reasonably available; d. it reflects the actuarys estimate of future experience, the actuarys observation of the estimates inherent in market data (if any), or a combination thereof; and. Before the changes in ASOP 27, actuarial specialists often would specifically disclaim any assessment regarding the expected long-term rate of return assumption when management selected the assumption and the actuary was not directly involved in the . Discount rates dropped to historical levels in 2019. Generally, a participants compensation will increase over the long term in accordance with inflation, productivity growth, and merit adjustments. Chicago, IL: Ibbotson Associates. stream The actuary may advise the plan sponsor about the selection of the discount rate. endobj Due to the uncertain nature of the items for which assumptions are selected, the actuary may consider several different assumptions reasonable for a given measurement. Section 3.8.3(j), Forward-Looking Expected Investment Returns, was modified to delete the educational material on forward-looking expected geometric and arithmetic returns. On an annual basis, at minimum, the board shall establish an interest rate assumption upon which the provisions of subsequent supplemental pension contracts shall be based. PDF Asset Allocation and the Investment Return Assumption The actuary should take into account factors specific to each measurement in selecting an investment return assumption. 25, Credibility Procedures, for additional guidance. Recent Data, Various Indexes, and Some Historical Data. bond yield rates as of the Measurement Date. Among the 131 funds that NASRA measured, more than half have reduced their investment return assumption since fiscal year 2020 as . %PDF-1.7 % In certain circumstances, such as a temporary reduction or freeze in compensation, the compensation increase assumption may be negative or zero. The Pension Funding Council (PFC) adopts economic assumptions for all plans/systems, except LEOFF 2 which are adopted by their Board; these assumptions are then subject to revision by the Legislature. The first exposure draft was issued in March 2018 with a comment deadline of July 31, 2018. endobj Section 1. These disclosures may be brief but should be pertinent to the plans circumstances. For PlannerPlus users, income taxes are estimated using all currently available state and federal tax rates and tax brackets through longevity. Economic assumptions have a significant effect on any pension obligation measurement. 29.22 relating to retirement; reducing the actuarial assumption for investment rate of 29.23 return; eliminating the delay to normal retirement age on the commencement of 29.24 postretirement adjustments and reducing the vesting requirement for the general 29.25 employees retirement plans of the Minnesota State Retirement System and the http://www.federalreserve.gov/releases/h15/ https://www.census.gov/library/publications/time-series/statistical_abstracts.html If the actuary is using an approach that treats inflation as an explicit component of other economic assumptions or as an independent assumption, the actuary should follow the general process set forth in section 3.3 to select an inflation assumption. Warning: Each web version of an ASOP is provided as is for convenience of the user only and is not, and should not be considered to be, the official version of an ASOP. For example, actuaries working with small plans may prefer to emphasize the results of general research to comply with this standard. The cap may be defined in the aggregate for the retiree group. This standard is effective for any actuarial report that meets the following criteria: (a) the actuarial report is issued on or after August 1, 2021; and (b) the measurement date in the actuarial report is on or after August 1, 2021. In developing a reasonable assumption for these factors and in combining the factors to develop the investment return assumption, the actuary may take into account a broad range of data and other inputs, including the judgment of investment professionals. These data may include the following: a. current yields to maturity of fixed income securities such as government securities and corporate bonds; b. forecasts of inflation, GDP growth, and total returns for each asset class; and. b. Impact on FY 2023 Contributions These data may include consumer price indices, the implicit price deflator, forecasts of inflation, yields on government securities of various maturities, and yields on nominal and inflation-indexed debt. The Kentucky ERS is composed of two plans: Hazardous and Non-Hazardous. j. Changes in the discount rate also affect the interest cost component of net periodic benefit cost, although the effect of an increase (or decrease) in the rate will be offset to some degree by the effect of the corresponding decrease (or increase) in the PBO or APBO to which the interest rate is applied. Taxes may be reflected by an explicit reduction in the total investment return assumption or by a separately identified assumption. PDF 2021 Global Survey of Accounting Assumptions - wtwco.com a. U.S. Bureau of the Census. In addition, the actuary should take steps to determine the type of forward-looking expected returns (i.e., forward-looking expected geometric returns or forward-looking expected arithmetic returns) and that they are used appropriately. For each previously selected assumption that the actuary determines is no longer reasonable, the actuary should select a reasonable new assumption. The actuary should not assume that superior or inferior returns will be achieved, net of investment expenses, from an active investment management strategy compared to a passive investment management strategy unless the actuary believes, based on relevant supporting data, that such superior or inferior returns represent a reasonable expectation over the measurement period. Calculate. Selection of Economic Assumptions for Measuring Pension Obligations, TO: Members of Actuarial Organizations Governed by the Standards of Practice of the Actuarial Standards Board and Other Persons Interested in the Selection of Economic Assumptions for Measuring Pension Obligations, SUBJ: Actuarial Standard of Practice (ASOP) No. endstream Interest rate information for selected Treasury securities. Effect of ReinvestmentTwo reinvestment risks are associated with traditional, fixed income securities: (i) reinvestment of interest and normal maturity values not immediately required to pay plan benefits, and (ii) reinvestment of the entire proceeds of a security that has been called by the issuer. As expected, there is a positive correlation between expected rate of return and the amount of plan assets PDF 03/31/23 04:44 pm PENSIONS SL/LD H3100.S3162-DE1 The disclosures should be based on the economic assumptions as of the measurement date at which they are applied without regard to changes to the assumptions planned for future measurement dates. Contribution BudgetingAn actuary evaluating the sufficiency of a plans contribution policy may choose among several discount rates. Depending on the magnitude and duration of benefit payments for a particular plan, these negative yields could meaningfully reduce the overall discount rate for a benefit plan or even lead to an overall negative discount rate, particularly for plans with primarily shorter-duration payments. The actuary should select reasonable economic assumptions. The actuary should take into account the possibility that some historical economic data may not be appropriate for use in developing assumptions for future periods due to changes in the underlying environment. Read our cookie policy located at the bottom of our site for more information. The actuary should refer to ASOP No. Notable changes made to the second exposure draft are summarized below. ASC 715-60-35-79 and 35- 80 outline similar requirements for the selection of assumptions for other post-retirement employee benefit (OPEB) plans. The actuary should take appropriate steps to determine the time horizon, the price inflation, and the expenses reflected in the expected returns. In July 2015, the ASB held a public hearing on actuarial standards of practice applicable to actuarial work regarding public plans. Tax Status of the Funding VehicleIf the plans assets are not kept in a tax-exempt fund, income taxes may reduce the plans investment return. PwC. The last revision of ASOP No. If you have any questions pertaining to any of the cookies, please contact us us_viewpoint.support@pwc.com. The disclosure may be brief but should be pertinent to the plans circumstances. Alternatively, the actuary may use a discount rate appropriate for defeasance, settlement, or market-consistent measurements. Those changes are classified as actuarial gains or losses. However, they cost money and require considerable effort. The expected long-term rate of return on plan assets should also reflect the long-term earnings expectations on contributions to the plan expected to be received during the current year. 27 was issued in September 2013. PDF Employees' Retirement System of The County of Milwaukee Minutes of The Under a benchmark approach, entities start with a rate from a published bond index and make certain adjustments, either upward or downward, to reflect the individual facts and circumstances of their plans. This might be the case when the employer has changed actuarial firms and the previously used spot-rate yield curve is no longer available, or the employer's actuary or an outside vendor develops a new curve that produces a discount rate that the client believes more appropriately reflects the characteristics of its benefit obligation. C`dEV-SC"8iAvWWtt7y} 7dgR VZm8U-6'`w3LG =! The actuary should take into account the balance between refined economic assumptions and materiality. Select and Ultimate Investment Return RatesAssumed investment return rates vary by period from the measurement date (for example, returns of x% for the first 10 years following the measurement date and y% thereafter). Follow along as we demonstrate how to use the site, In addition to the demographic and actuarial/economic assumptions discussed in the previous section, pension and OPEB plans require financial assumptions to be made to value the plan obligations. For plans other than private single-employer plans (for example, church plans, multiemployer plans, public plans), the discount rate for current-year funding requirements may or may not be prescribed by other entities. b. 3-12C-1502. A specific assumption or method that is mandated or that is selected from a specified range or set of assumptions or methods that is deemed to be acceptable by applicable law (statutes, regulations, and other legally binding authority). In a pension plan context, it is the discount rate that equates future . The assumed rate of return will not be reduced below the bottom of the range. Information regarding the constituent bonds in the related bond index. Nothing in this ASOP is intended to require the actuary to disclose confidential information. Compensation data may include the following: a. the plan sponsors current compensation practice and any anticipated changes in this practice; b. current compensation distributions by age or service; c. historical compensation increases and practices of the plan sponsor and other plan sponsors in the same industry or geographic area; and. These assumptions include the discount rate and estimate of future salary and benefits levels. The footnotes at the bottom of the page, which reflect additional explanations, qualifications, and scheduled future developments for certain plans, are a critical component of this data set. Estimating the projection horizons for the expected returns. However, it may not be appropriate to assume that future contracts will provide the same level of compensation changes as the current or recent contracts. In these situations, the compensation increase assumption may reflect a shortened measurement period that ends at the expected termination date. Such factors may include the following: a. <> The actuary should disclose any explicit adjustment made in accordance with section 4.1.1. PDF Pension Funding and The Actuarial Assumption Concerning Investment Returns In it, the fund's actuary projected that pension costs would likely exceed $220 million annually by 2038, eating up 32% of the T's operating revenue. Under this approach in Figure PEB 2-1, it is appropriate to consider the following: Many pension plans, and some OPEB plans, are pay related, requiring an assumption as to future salary increases. Assumed discount rates shall reflect the rates at which the pension benefits could be effectively settled. For example, the difference in yields between inflation-linked and non-inflation-linked bonds may include premiums for liquidity and future inflation risk in addition to an estimate of future inflation. The distinction between the pension liability discount rate assumption and the investment return assumption is often blurred in practice because it is assumed that they are numerically equal. The lower expected rates of return assumptions in almost all the developed countries for 2020 could possibly be attributed to a more conservative stand by pension sponsors regarding the fixed income and equity markets returns in the future. The median return for state-managed plans was 27% in 2021. Assessing forward-looking capital markets returns for the individual asset classes. Assumed discount rates shall be reevaluated at each measurement date. The WRS' long-term return assumption for 2017 was 7.2 percent; however, the plan uses a lower discount rate of 5 percent to calculate the cost of benefits for workers once they retire. The actuary may use stochastic simulation models or other analyses to develop expected investment returns from this statistical data. This standard applies to the actuarial advice given in such situations, within the constraints imposed by the relevant accounting standards. Each member firm is a separate legal entity. One approach to setting the payroll growth assumption may be to reduce the compensation increase assumption by the effect of any assumed merit increases. State Pension Funds Reduce Assumed Rates of Return For each economic assumption that has a significant effect on the measurement and that the actuary has selected, the actuary should disclose the information and analysis used to support the actuarys determination that the assumption is reasonable. The term reviewers in appendix 2 includes the Pension Committee and the ASB. Purpose, Scope, Cross References, and Effective Date, 2.5 Prescribed Assumption or Method Set by Another Party, 2.6 Prescribed Assumption or Method Set by Law, Section 3. Assumptions such as compensation increases or cash balance crediting rates are often used to determine projected benefit streams for valuation purposes. When the actuary is responsible for selecting or giving advice on selecting economic assumptions, the actuary may incorporate economic data and analyses from a variety of other sources, including representatives of the plan sponsor and administrator, investment advisors, economists, and other professionals. PDF 2022 Florida Local Government Retirement Systems Actuarial Fact Sheet The objective in determining an appropriate discount rate using a bond-matching approach is to match cash flows of the plan to principal redemptions on zero coupon bonds. Consider removing one of your current favorites in order to to add a new one. 9 Even if investments fall short of the long-term return assumption, the amount set aside for each retiree should be enough to pay for the base benefit without . Public Pension Funds and Assumed Rates of Return: An Empirical January 5, 2021. Investment PolicyThe plans investment policy may include the following: (i) the current allocation of the plans assets; (ii) types of securities eligible to be held (diversification, marketability, social investing philosophy, etc. Under this approach, the percentage of total plan assets of each component of the plan asset mix is multiplied by the expected asset return for that component. Plan benefits or limits affecting plan benefits, including the Internal Revenue Code (IRC) section 401(a)(17) compensation limit and section 415(b) maximum annuity, may be automatically adjusted for inflation or assumed to be adjusted for inflation in some manner (for example, through regular plan amendments). b. In December 2014, the ASB formed the Pension Task Force and charged it with reviewing these comments and other relevant reports and input to develop recommendations for ASB next steps. . The ASB voted in June 2020 to adopt this standard. So it is fair to ask whether they are necessary and what an appropriate scope for review is. Indeed, assumed long-term rates of return are approximately 30 basis points higher for firms that are acquiring other firms. Section 3.5.6, Views of Experts (now Other Sources of Economic Data and Analyses), was renamed and clarified to provide for use of other sources of economic data and analyses.
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